As the markets rock and roll from one event to another hopefully readers kept a close eye on the $/Yen rate that we discussed in the previous Letter. It certainly helped me, there is nothing like a bit of carry trade unwinding to help with market direction.

Okay, I'll put my trumpet back in its box and get on with writing something less egotistical.

A recap of the scenario:

bubble, easy money, inflation in fiat money supply, inflation in commodities and hard assets, inflation, fear of inflation, rising rates, YC inverting, flattening, rising and inverting again, tightening, withdrawal of liquidity, corrections, crashes, talk of stagflation, FEAR, withdrawal of speculative funds, further corrections and crashes, demand collapse.......Deflation.

Yes, its time to remind you of the path I expect to see for the global economy. I do mean global, this is not a US-centric problem and in my opinion, never has been. So, where are we along the path? What clues are out there to help us, what analysis can be looked at to help us peer forward through the swirling smoke billowing up from the burning bundles of derivative paper?

How about looking at the words of Mr Bernanke? Most readers have probably seen the recent video clips of his Q&A session with Ron Paul, how he sat there looking like he wished he was anywhere else, or so the commentary goes. Very little has been written about his testimony, yet it contains some useful insight. So why not use it, after all at least his agenda is a lot more transparent than the analysis coming from the Bank/Broker/Financial Cabal. Shall we?

Okay, below is the extract from the testimony that I am interested in. Its the section where Mr Bernanke spells out what he sees as the forthcoming economic scenario and the possible up/down side risks. I am going to insert numbers into the text as we go along and I'll tabulate my thoughts to his remarks after the statement.

Chairman Ben S. Bernanke

The economic outlook

Before the Joint Economic Committee, U.S. Congress November 8, 2007

"Overall, the Committee expected that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate. Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane. (1)

The Committee also saw downside risks to this projection: One such risk was that financial market conditions would fail to improve (2) or even worsen, causing credit conditions to become even more restrictive than expected. Another risk was that, in light of the problems in mortgage markets and the large inventories of unsold homes, house prices might weaken more than expected, which could further reduce consumers' willingness to spend (3) and increase investors' concerns about mortgage credit.

The Committee projected overall and core inflation to be in a range consistent with price stability next year. Supporting this view were modest improvements in core inflation over the course of the year, inflation expectations that appeared reasonably well anchored, and futures quotes suggesting that investors saw food and energy prices coming off their recent peaks next year. But the inflation outlook was also seen as subject to important upside risks. In particular, prices of crude oil and other commodities had increased sharply in recent weeks, and the foreign exchange value of the dollar had weakened. These factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well. (4)

Weighing its projections for growth and inflation, as well as the risks to those projections, the FOMC on October 31 reduced its target for the federal funds rate an additional 25 basis points, to 4-1/2 percent. In the Committee's judgment, the cumulative easing of policy over the past two months should help forestall some (5) of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time. Nonetheless, the Committee recognized that risks remained to both of its statutory objectives of maximum employment and price stability. All told, it was the judgment of the FOMC that, after its action on October 31, the stance of monetary policy roughly balanced the upside risks to inflation and the downside risks to growth." (6)

(1) Hey thats not bad stuff Ben, I wonder if he will start a blog? Right, we have a lot to cover here so lets get started.

(2) This needs to be re-read, Mr B is being quite bearish on the prospects of the US economy for this Q and into next year in the first paragraph and then gives that scenario a further downside risk. The risk being that if conditions in financial markets fail to improve. In other words the current status quo is enough for The Fed to downgrade the outlook. Conditions do not have to worsen for the downgrade, if there is not a rapid and widespread change in credit market conditions starting right now, then the Fed will have been too bullish.

(3) This is a direct reference to a weakness in consumer spending. Mr B is shouting "spillover effects" from the rooftops. I know its couched in that particular phrasing used by The Fed but its not oblique. Mr B is worried about spending power, not sentiment. I suspect he already knows that sentiment is seriously damaged.

(4) This is a very clear analysis of the current situation and the effects the current rises in oil, commodities and the drop in the $ could have on long term inflation. He seems worried that inflation expectations are under threat of breaking free from The Feds intended direction. This is not the rhetoric of a man readying the market for a series of cuts. This is the noise made by a Fed that wants to raise. Is Mr B preparing the way for a "Volker Attack" on inflation?

(5) "Forestall some of the adverse etc, etc". Take that as a full on warning that The Fed is limited in what it can do to help the "broader economy". I suspect the reason why the US Tsy had to help set up the Super Sell to You SIV-Lite Bailout Vehicle (Lets call it Cellulite, its a perfect description) was because Mr B would not lower himself to bailout speculators and gamblers. Is this a "hidden" display of morals and ethics by Mr B?

(6) Very straightforward. The view expressed is guaranteed for one day only, 31st Oct 07. From then on all aspects are subject to change, without notice. Risks can go to the downside as well as the upside. Now, you tell me, how often do you read bloggers, analysts, journalists and any other talking head that doesn't do the same as Mr B, qualifying the outlook or opinion as "depending on future data"? Yep, just about every single one.

So is Mr Bernanke getting undeserved criticism? I think he is and I think I know why. There is a war on Wall St right now and its viscous. There are interests that need protecting, accounts that need to be kept hidden and rescues that have to be carried out. All of this has to happen in conjunction with falling rates . If it doesn't happen quickly, with the full cooperation of the Regulators, Fed and USTsy, then whole ponzi scheme comes crashing down. Someone though isn't giving out enough covering fire. Mr Bernanke is keeping some of his powder dry by not telegraphing further rate cuts, in fact you could easily see a case for rate rises if some of the downside risks become too big to ignore.

Wall St doesn't like it. The last thing the Cabal expected was that they would have to use their own money to sort out their own mess.

Is Mr Bernanke getting bad press at the behest of Wall St?

Finally, a few snippets that may help you decide if Ben is looking in the right direction.

UK: Tuesday Morning Market: Rising inflation dampens rate cut hopes.

US OUTLOOK: From Goldman: "Without a rapid pullback in oil prices, year-over-year CPI inflation is likely to reach 4% by early 2008, and PCE inflation should push past 3%."

US OUTLOOK: From UBS: reducing GDP forecasts through mid-year 2008 (1.2 Q4 '07 and 1.4% 1H 2008) and lowering terminal Fed Funds target to 3.5%.

US DATA: Nov IBD/TIPP Economic Optimism Index takes a dive, falling 3.5 points, or 7.4%, to 43.8. The report said:

"Persistent negative reporting in the media along with high-profile stories about large companies cutting jobs are helping to reinforce American's negative view of the economy. Tangibles like high fuel prices, rising retail prices and the mortgage crisis are also to blame."

If Ben did a blog, would you read it? If you did read it, where on the eco-path do you think we are?

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